REUTERS/Sheng Li
While global steelmakers will enjoy falling costs for raw materials like iron ore and metallurgical coal over the short term, China’s economic slowdown is spelling tough times for them over the secular horizon.

The days of ever-increasing Chinese demand for steel are over and, as a result, apparent steel usage in China is expected to rise only 0.8% in 2015, according to the World Steel Association.

Over half of the world’s demand for steel comes from the construction industry, and China has the world’s largest construction market. But the outlook for construction in China is not so positive anymore. With high local debt-to-GDP ratios and inadequate returns on past infrastructure investments, local governments will find it difficult to take on new debt to fund further infrastructure investments.

That, plus the large volume of new housing already constructed and the fact that Chinese households are diversifying their investments away from the housing sector, means China’s breakneck pace of housing construction is no longer sustainable.

Another reason: According to Morgan Stanley research, China’s dependency ratio (the ratio of dependents to the total population) bottoms out this year because of its one-child policy. This creates excess housing supply because the policy’s long-term effect has been that every two sets of parents leave their housing to one younger couple when they die. So over a secular timeframe, net demand for new housing is likely to fall.

Overall, we expect steel companies to be relative winners over the short term due to lower raw-material costs. But longer term, demand fundamentals are stacking up against them.